April 2014

NORDIC REPORT: The gold standard

NordicsInstitutional investors in the Nordics are pioneers at socially responsible investment. What happens to the industry in this region is a barometer for the rest of the world. George Mitton reports. In 2001, THE AP7 pension fund of Sweden took a bold move: it sold shares in 27 companies, including global brands such as Coca-Cola, General Motors and Wal-Mart, which it said were guilty of violating international conventions on issues such as child labour, human rights, the environment, bribery and corruption. It was a watershed moment for socially responsible investment (SRI) in the Nordic region. A couple of years later, Norway’s giant petroleum fund followed suit by drawing up an exclusion list of companies with a poor record on environmental, social and governance measures. The pension fund, which owns 1% of all global equities, sold any holdings on the list and committed not to buy them unless the companies made clear improvements. The actions of these influential investors had an effect. Soon, almost all large asset owners in the Nordics were obliged to write their own SRI policy and invest accordingly. The fledgling SRI industry had gathered serious momentum. Ten years later, the Nordic region is still a world leader when it comes to SRI, yet the demands of the big investors have evolved over time. What is it these big investors need and how can asset managers best serve them? Perhaps the biggest change in the SRI world in the past decade concerns the policy of exclusion. Instead of simply selling stocks that fail on SRI principles, many investors now opt to keep their holdings and try to influence corporate behaviour as shareholders. “Sometimes Scandinavia is viewed as a place where you only do negative screening,” says Ulrika Troedsson Hasselgren, chief executive, Ethix SRI Advisors, a Stockholm-based service provider. “That’s not really true. You have many investors also engaging, keeping the stock and trying to impact through their ownership.” To this end, asset managers that can assist their clients with issues such as proxy voting have done well in the Nordics. The Responsible Engagement Overlay service from F&C Investments is one example of a successful offering. “The view is that if you don’t sell, you should care,” says Mamadou-Abou Sarr, senior investment strategist for Northern Trust Asset Management. SRI CAPABILITY
The other big trend is expressed in the buzzword “integration”. The idea is that SRI should be incorporated into all investment decisions, so that while analysts assess the profit and loss of a target company, specialist researchers analyse its carbon emissions or human rights record. The upshot is that Nordic investors want asset managers to demonstrate that they can apply SRI across the board, not just in specialist funds. According to Rob Lake, an independent responsible investment adviser, this means a Nordic pension fund planning to outsource some of its equity exposure would want its provider to show SRI capability that spans the asset class. “In a sense that’s challenging for asset managers,” he says. “But, to put it positively, there’s a much bigger opportunity for asset managers who really understand the SRI issues to thread them through everything they’re doing.” Integration is a concern for the very largest investors in the region. Lake was part of the strategy council that reviewed the investment process of the Norwegian petroleum fund last year. One of the council’s proposals was to better integrate SRI issues into all investment research. FINANCIAL SENSE
Related to these trends is a growing sense that SRI is not only good ethics, but makes financial sense too. Last year, the AP4 fund in Sweden set up a low-carbon emerging market equity index fund with Northern Trust that excludes companies with high carbon dioxide emissions or large fossil fuel reserves. The fund’s chief executive, Mats Andersson, argues that companies with high emissions are associated with higher costs in the long term. Individual fund managers, such as Anette Andersson of SEB Asset Management, help to support the financial argument. A manager who does not believe in separating SRI criteria from financial research, Andersson is also a top performer. “She’s the highest rated manager among our equity managers,” says Viktor Andersson, her colleague and co-head ESG analysis, SEB Wealth Management. “I can just point to her to show how you can be fully integrated and also top ranked.” That’s not to say there isn’t room for improvement in the Nordic SRI industry. Although Nordic asset owners are world leaders at SRI, some of the most established asset managers in the sector are based outside, such as Impax Asset Management in London or RobecoSAM in Switzerland. There may be a need for local players to catch up. That said, some Nordic asset managers are consistently praised for their SRI work, such as Nordea, while some insurance companies take SRI seriously, such as Storebrand or KLP. TOO POLITICAL
There are still questions about SRI criteria to be answered, though. Laws on environmental protection in emerging markets may not be as advanced as in the West. If a mining company obeys local laws yet endangers the environment, should they still be penalised by investors? Another controversy concerns tax. Should companies who make active use of tax shelters be penalised on SRI grounds or are they simply acting rationally to return the most money to their shareholders? In some cases, there is a risk that the SRI agenda can become political. In January, Dutch pension fund PGGM sold its holdings in five Israeli banks, which were involved in financing Israeli settlements in the occupied Palestinian territories. Helge Arnesen, Norway country head for Alfred Berg, supports responsible investment, yet he warns, “it can be a challenge if this moves too politically. It may alienate some people.” Yet despite these concerns, there is little chance SRI will decline in importance in the Nordic states. A combination of these countries’ small populations and a long-standing commitment to transparency mean journalists and campaign groups can exert significant pressure on asset owners. “No matter what study you do of transparency, the Nordic countries are always top,” says Ketil Petersen, Nordic country head at Schroders. “The more transparent things are, you can’t hide.” WHISTLEBLOWERS
With the high level of media scrutiny, the scope of SRI is likely to widen. Last year, there was a discussion in the Danish media about whether investors should exclude sovereign bonds issued by countries where there are high levels of human rights abuse. Other discussions are likely to concern corruption and bribery, and how investors should respond to revelations from whistleblowers, who are often the only ones capable of bringing bribery to light. Meanwhile, SRI is gradually bedding down into law in the region. For instance, every institutional investor in Denmark is now required to have an SRI policy in place. Susanne Røge Lund was recently employed in the newly created role of SRI officer at PensionDanmark, tasked with ensuring the fund obeys its policy. “We take care of other people’s money,” she says, “so we have to be sure we put it somewhere where it doesn’t do any harm”. ©2014 funds europe

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